One of the most popular debates in the advisory industry today is whether small advisory firms of the future will be able to compete against the ongoing growth of today’s mega-advisory firms, from the small subset of the largest independent RIAs that control the marketplace (with more than 60% of client AUM held by fewer than 4% of firms), to the national brands like Vanguard and Schwab that are increasingly competing with independent advisory firms directly. Yet despite the negative forecasts, industry benchmarking studies continue to show record profits for the most successful solo advisory firms, generating as much income as the per-partner take-home pay of billion-dollar firms!
The ongoing success of the small firm shouldn’t be such a surprise, though, given the “long tail” phenomenon that is increasingly being observed in many industries – where niche providers can survive and thrive as technology makes it increasingly feasible for consumers to find their way to them, from niche books being found on Amazon, niche music being found via streaming music services, and niche financial advisors able to be found via a simple Google search.
The caveat, however, is that, as the biggest advisory firms scale their operations and marketing and establish recognized brands, while niche advisory firms thrive in the online marketplace of the internet, “something” has to give. But the “something” appears not to be large firms dominating small ones, or small firms picking off the clients of large ones… but instead, both applying substantial business pressure to the dangerous middle in between. Which today would encompass a wide range of advisory firms from $100M to more than $2B of assets under management.
Because unfortunately, it’s the firms in the dangerous middle that are both too small to be big (lacking the scalable marketing and established brands of regionally and nationally dominant firms), but are too big to be small (struggling to capitalize on a focused niche to differentiate). And instead have to grow through a series of challenging business hurdles, from a capacity wall of client service to a complexity wall of operational infrastructure and a growth wall of centralized, scalable marketing.
Fortunately, the good news is that some firms really do grow successfully through the dangerous middle, but the rising pace of advisory firm mergers and acquisitions – with an average deal size directly in the middle of the dangerous middle range – suggests that more and more firms are feeling the pressure to either get much bigger to get past the dangerous middle, or consider how to downsize and get smaller instead (either by outright downsizing the firm, or by tucking into a larger one to simplify the practice).
The bottom line, though, is just to understand that, as the long tail grows longer and the big head grows bigger, the future of financial planning isn’t about whether the “small” firms will win or the “big” firms will win. There is room for both to succeed, as the biggest advisory firms grow bigger with their size and scale and the smallest advisory firms grow more profitable. Just be wary about getting caught in the dangerous middle.
source https://www.kitces.com/blog/dangerous-middle-long-tail-big-head-financial-advisory-firms/
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